The EMCO Ratio Exercise

Hello Business Owners!

Have you prepared your financial statements & a calculator for today’s article? But first, let me give you a quick recap of last week’s article so you don’t miss a thing! I shared with you last Friday, an article about the importance of Business Evaluation. This comes in as a necessary step if you want to implement my first principle: Pay Yourself First. I also introduced you to the EMCO Ratio.?

Once you slowly start understanding the numbers of your business, you’ll soon enough be able to make informed decisions as your accountant turns into your business advisor. And financial freedom will be a short, few steps away!

Let’s begin.?

This week we are here to discuss an often-overlooked area of business: Business Evaluation.. Now, could you please bring out a calculator, paper and pen (or the notes on your phone) and carry out a rough estimate??

Once you see the results for yourself, I guarantee you will be opening up that balance sheet and seriously utilising our EMCO ratio. Are you ready to know how to evaluate your business?

The EMCO Ratio

As a quick reminder, the EMCO Ratio tool helps you evaluate how well your business is doing. It’s important to note that if your annual turnover is below ￡150,000 the ratio needs to be different. Please reach out to get the ratio for that turnover (below ￡150,000). However, if your annual turnover is above ￡150,000 then congratulations on your growth. If you are in this stage, you are likely to require the employment of more staff, and have more expenses, hence reduce your own pay ratio.?

Below is the EMCO Ratio for Businesses with a turnover of ￡150,000.

The EMCO Ecersie (What you’ll need)

-Last year’s financial statements (company accounts)

-Use the figures in your accounts and put them into the cells provided, just as in the example below. (Your sales ratio is always 100%.)

-The ratio for salaries is an amalgamation of the amounts you pay to people involved in your business: staff, freelancers, subcontractors, virtual personal assistants and so on. Add these costs together and record them in the cell.

-Calculate the salary ratio using the formula:

(C x B) / A

-Calculate the owner’s pay ratio using the formula:

(D+E) x B / A

-Calculate the administration cost ratio using the formula:

(F+G) x B / A

It’s the moment of truth. What do your ratios tell you?

Stay tuned for next Friday’s article where you’ll learn the interpretation of different ratios.

For more assistance, please reach out by messaging me on LinkedIn.